This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
What do you do when one of the best bankers in the business downgrades the shares of one of the biggest names in e-commerce? Personally, I listen up -- and from what I hear, Barclays Capital isn't too hot on Amazon.com (NASDAQ:AMZN) these days.

Reviewing the stock yesterday, Barclays pointed out that after more than doubling off its November 2008 lows, Amazon is starting to look a mite pricey. The banker does believe that Amazon will continue to gain market share, grow revenue and free cash flow. But at a current valuation of 50 times consensus expectations for this year's earnings, the stock more than reflects these prospects. Barclays thinks the shares will change hands for about $70 a stub one year from now -- roughly 10% below where they're trading today -- and thus downgraded the stock to "equal weight."

Frankly, that seems counterintuitive. If the stock's selling for 10% more than it's worth, shouldn't Barclays have cut the stock all the way to "sell?"

Let's go to the tape
Maybe, maybe not. Barclays does admit that there's a chance Amazon will outperform its estimates for this year's earnings. And all things considered, if Barclays feels hesitant to downgrade the stock too far, you probably should be, too. Because when it comes to picking winners and panning losers, few analysts do better than Barclays. Its "wins" column is chock-full of high-profile, high-tech, and retailing names:

Where Barclays falls down on the job ... well, you know how they say most accidents take place within five miles of your own home? Barclays resides in the banking district, and its biggest mistakes tend to take the form of overly bullish bets on banking:

But even the occasional misstep in picking banks doesn't tarnish Barclays' achievements too much. This banker continues to post a market-stomping record of nearly 61% accuracy on its picks (which is harder than it sounds, believe you me). Its average recommendation beats the S&P 500's performance by more than 6.5 percentage points.

With a record like this, it's no surprise that Barclays outperforms nearly 99% of the investors we track on CAPS. Also unsurprisingly, the banker's already beaten the market by nearly 64 points on its Amazon pick.

Don't be scared by big numbers
Do you find Barclay's performance intimidating? I sure do. But I also find it reassuring to see that at least one banker out there is good at its job. So when Barclays says, "Take a breather from this run-up, but don't dump your Amazon shares just yet," I'm inclined to trust that advice -- even more so when I look at Amazon's numbers.

Others might be frightened by Amazon's 51 price-to-earnings ratio, which looks steep relative to projected earnings growth. They may fear these shares are overpriced and ready to fall.

But when I look at the company, I see $1.36 billion in free cash flow generated last year -- more than twice what Amazon reported as net earnings. Based on that, I agree with Barclays that this is not really a "51 P/E stock," but rather a company priced at 24 times free cash flow. Factor in expected annual growth of 23%, and Amazon is probably fairly priced right now.

Toss in the fact that Amazon the company is even cheaper than Amazon the stock (since that stock comprises 9.4% net cash), and I think Amazon today looks at worst fairly priced. If anything, it may be even a bit cheaper than Barclays believes.